Pre-Budget blues – going beyond the numbers

India’s economy desperately needs funds to make it emerge from the negative GDP growth territory

This column will appear a little before the Budget. Its purpose is not to talk about what the Budget will usher in, but what needs to be done to make the numbers and the allocations meaningful.

True, deficit financing will zoom. India’s economy desperately needs funds to make it emerge from the negative GDP growth territory.

But do remember that it is easy to grow the GDP on borrowed money. It can finance bridges, train tracks, ports, and highways. But borrowed money has interest costs. Therefore, investments must become profitable and create jobs. Or tax income from other sectors should grow rapidly. Else, borrowings will boost India’s liabilities. Left unchecked, it will lead to a debt trap.

So, what should the government do? First, avoid the temptation to call bans, bandhs, closures, bans on films, bans on Facebook posts and the like, and bans on what people cannot eat.

Bans don’t work. The US ban on China failed. China continued growing. India’s ban on TikTok in June 2020 also was counterproductive. TikTok racked up 136 million app downloads in 2020, double that in 2019. The ban on WeChat only helped WhatApp in India. But children in India -- who could have been exposed to the bestof-breed technologies for image editing, shapeshifting – lost out.

No wonder then, India’s per capita GDP lags those of its peers (see chart). Even Bangladesh sported a higher GDP per capita than India.

Bans may be politically appealing. But they can be economically disastrous.

When it comes to the ban on cattle slaughter, do note that when a farmer buys cattle, it is an investment. Second, the farmer gets Rs 20,000 or more for each cow that has stopped lactating. If the government does not like the idea of cattle slaughter, please pay the farmer Rs 20,000 for each non-lactating cow. Then take it away from the farmer because even maintenance costs for old cattle can be horrifyingly expensive.

If the farmer does not get his Rs 20,000 per nonlactating cattle-head, he or she will not purchase fresh milch cows to replace the older ones. Obviously, this will hurt the farmer, increase farm distress, and hurt the economy. It adversely affects leather, a labour-intensive and export-revenue generator.

Another issue that needs to be highlighted is the desperate need to improve investment in human capital (see chart). India’s investment on education and health is pathetic. The only country which has performed worse than India in this neighbourhood is Pakistan. All the other neighbours have registered a higher HCI (Human Capital Index score).

Obviously, the first step would be to provide additional sums for health and education. But that is only the first step.

There must be enabling policies – like increasing seats in medical colleges. And measuring outcomes in schools to decide which school needs to be prised away from a bad management. The best way to do this is by expanding the medical seats in government-owned hospitals. No additional land is required because hospitals can have more floors. There is no shortage of patients, which is what medical colleges require sorely.

Resist the temptation of degrading education.

Don’t erode the autonomy of educational institutes of excellence like the IIMs and IITs.

Avoid the ridiculous idea of treating homeopaths as full-fledged allopathy doctors. Don’t give in to ridiculous ideas of a short-term bridge course to upgrade homeopaths or ayurveds to allopaths. If short-term bridge courses were the right way forward, why not have short-term bridge courses to promote court clerks to judges? Or office clerks to IAS officers?

Then, there is the need for foreign investments. As pointed out earlier, India needs around $1.5 trillion of investments annually to become a $5 trillion economy. India’s FDI is barely $80 billion annually. To attract large investments, India must provide for effective dispute resolution, investment protection and even abolish reservations (of any manner whatsoever).

Alternatively, it can create special economic zones where industries can get all the three desirables mentioned above.

Finally, there is the issue of revenue leakages. There are good reasons to believe that there could be a leakage of as much as Rs 3 lakh crore from the exchequer. To stanch such leakages, first remove the provision deftly inserted in March 2018 as an amendment to the FCRA (Foreign Contributions Regulations Act). It allows political parties to receive foreign funds, with no questions asked, with retrospective effect, for 42 years. Such an amendment encourages political parties to become money-laundering machines.

At the same time, impose margins on speculative trades in the stock markets. The longer the fire rages on in the stock markets, the more will money flow away from infrastructure and manufacturing growth.